Era Changeover

October 14, 2008

Some months ago this analyst began voicing his view that what we are witnessing is the end of an old era and the commencement of a new one. Events of the past two weeks have certainly had no precedent. Comparing the market’s behavior today with that of 1929-1933 ignores the fact that in those days there was not the quadrillion dollar derivatives risk exposure that some analysts argue exists today.

Over the past few weeks I have been attempting to inject a modicum of cold reason into the debate on gold

Whilst I am a long term bull on gold, I had a concern that there are too many chartists cheering from the sidelines just “willing” the gold price to explode upwards. Analysis of the longer term gold price charts did not confirm this widespread optimism, and one of the main charts to which I referred was a weekly chart with 20 and 42 week Moving Averages superimposed. Below is an updated version of this chart to October 13th 2008. (Courtesy stockcharts.com)

A close look at this chart reveals the following:

  1. The price is still moving within the confines of a flag (consolidation) formation and is above its long term rising trend line.
  2. The 42 week MA is pointing up
  3. There is resistance to further upside movement in priced at $896 (at the 42 week MA) and at approximately $960 (at the downward sloping upper channel line of the fan formation)
  4. The price is below both the 20 week MA and the 42 week MA
  5. The 20 week MA is below the 40 week MA – having recently given a “sell” signal when it crossed over.

Interim conclusion

Whilst the long term direction of the gold price is “up”, the intermediate term direction is less certain and some weakness is visible.

The issue which has been occupying this analyst’s mind in recent months has been that if the derivatives market starts to implode, such a development will likely presage a collapse of the entire world’s financial infrastructure. It is for that specific reason that he has been extraordinarily cautious regarding the possibility of an upwardly exploding gold price. From one perspective, the world’s leaders would have to pull out all stops to prevent a catastrophic collapse of the system – even to the point where they changed the rules and closed the markets. From another perspective, such an upward explosion would represent a pyrrhic victory for gold bugs.

The Point and Figure Chart below shows a triangle consolidation with $825 as the key support level. Whereas this chart was recently calling for a price of $1400 on the upside, it is now calling for a price of $484.80 on the downside – based on vertical count measurement technique.

Given that the gold price is still clearly in a Primary Bull trend (and will remain so even at the target price) I am less inclined to accept the vertical count downside target than the horizontal count downside target – which is around $690 per ounce at this stage.

However, before we get carried away with our bearish observations, the chart below shows that gold has broken up relative to commodities. There can be no objectively defensible argument against the observation that gold is now no longer being regarded as a mere commodity.

So what does all this mean?

To this analyst, it means that the gold price may have some further downside potential within the confines of a Primary Bull Market.

But it’s not as simple as it seems. The chart below shows that gold is now also demonstrably outperforming the gold shares.

This is counterintuitive in context of shares which are leveraged to the gold price. Theory would argue that the shares should always outperform gold in a bull market and always underperform gold in a bear market. How can gold shares be performing as if gold was in a Primary Bear Market and commodities be performing as if gold was about to become the currency of last resort? It makes no sense.

All of which now raises the question as regards whether the rules of the game may be changing. Are we entering a new era?

The past 100 odd years have been characterized by a dominance of private sector led policy makers who have come to accept as axiomatic that “money supply” is the driver of the economy. I strongly disagree with this argument. Logic dictates that if you lend someone some money today so that he may consume today then, yes, economic activity today will be stimulated. But the day will come when the borrower will have consumed that which was bought and is now faced with the obligation of repaying the debt. What started off as exaggerated economic growth on the upside will end up as exaggerated economic contraction on the downside.

Borrowings should be for the purpose of funding capital investment, not consumption. It’s a simple concept that is not difficult to grasp. Borrowing for consumption makes you poor. Borrowing for genuine capital investment makes you rich. Entrepreneurial activity is the engine that “drives” the economy, not money. Money is grease for the economic wheel, and “energy” is the fuel for the entrepreneurial engine.

In the twilight years of the twentieth century, our morally corrupt leaders (or amoral leaders, it doesn’t matter which) moved to protect the legacy energy industries from competition when they should have been moving tostimulate the emergence of competitive alternative energies. That act (evidenced by a failure to ratify Kyoto, and FURTHER evidenced by their predisposition to want to support carbon emission trading) is what rang the death knell of the old era.

Whether we enter a new era or whether we collapse in a heap will be dependant on whether the alternative energy technologies emerge quickly enough to facilitate entrepreneurially driven wealth building activity on a large enough scale.

The technologies are there. They need to be supported with gusto and enthusiasm. If the authorities are so hell bent on throwing $700 billion at someone, then they would be better advised to throw it at the entrepreneurs who will be leading the charge to dig us out of this quagmire. $700 billion to wallpaper over the cracks? Just how counterproductive do one’s actions have to be before they are recognizable to everyone as counterproductive?

You want to stop the banking industry from collapsing? Simple: Nationalize it.

Why does banking have to be a Private Enterprise activity? It should be a not for profit activity. Any profits made by the banking industry should be for the benefit of the community.

By all means, let’s have a Capitalist based Free Enterprise market. That’s the proven way of unlocking entrepreneurial energy. But there’s no logical reason for banks to be privately owned. Why should peddling grease justify excessive profits? That is the argument of silver tongued bullshit artists. It is entrepreneurial activity – not banking – that should be excessively rewarded. It is entrepreneurial activity that builds true wealth. Private Sector banking is an oxymoron. Private Sector banking is a contradiction in terms and it represents a massive conflict of interests between government of the people, by the people for the people; and those who seek to leech off the people.

Welcome to the demise of the era of private enterprise banking. Welcome to the new era of entrepreneurially driven economic activity, fuelled by non fossil fuel energy technologies, and funded by a central government controlled banking industry operating in the interests of society as a whole.

There will be those who react violently and negatively to this argument. To those people, I make the following response: Read my novel, Beyond Neanderthal. Your testosterone is showing. As the medical profession has accepted for eons: Primum Non Nocere (first do no harm). A private enterprise driven banking industry is structured to do harm in the long term. We are witnessing that harm now and it is unarguable.. Private Sector banking has caused the problems we now face.

The issue has not been related to which currencies are in circulation. The issue has been the egocentric orientation of those who decide how much currency to make available. Gold may be part of the solution to the currency problem, but it can never be “the” solution. It represents one ingredient of the cake.

The world’s largest gold nugget is 61 lbs, 11 oz and is on display in Las Vegas.